Focus On: Medicare Lab Payment: Medicare Payment Proposals Portend Implementation Problems

Three new lab payment proposals from the Centers for Medicare and Medicaid Services (CMS) represent major changes in Medicare policy, and the implementation of each of them raises substantial problems, concludes Bruce Quinn, a senior health care policy adviser for the law firm of Foley Hoag and a former regional Medicare medical director for the California Part B program. In a new white paper, “Is Medicare Zero for Three? Diagnostic Policy Proposals for CY2014,” Quinn analyzes Medicare’s latest proposals and explores their potential impact on clinical and anatomic pathology laboratories. All three proposals were issued July 8, 2013—two in the Physician Fee Schedule (PFS) proposed rule and one in the Hospital Outpatient Prospective Payment System (OPPS) proposed rule. Final rules are due out around Nov. 1. “Taken as a group, the three policy proposals show remarkable ingenuity and reflect a deep-seated agency desire to policymakers to pull their weight in finding creative ways to reduce costs and prices in the U.S. health care system,” write Quinn. “While granting ‘A for effort’ or ‘I for ingenuity,’ all of the three proposals portend major implementation problems and none should be finalized as proposed.” CLFS Technological Revaluation While Quinn notes that CMS has statutory authority to revalue the prices of the Clinical Laboratory Fee Schedule (CLFS) based on changes in technology, CMS has never used this authority. CMS is proposing to review all CLFS prices over the next five years, assessing “technological change” by comparing technology in place at the time each code was priced with current technology and repricing each test accordingly. Most prices on the CLFS were set in 1984 and in real dollars they have eroded over time due to inflation. A test priced at $10 in 1984 was paid at $8.32 in 2010. If updated for inflation, this test should currently be paid at $21.81 (see chart). Under the proposed policy, CMS defines “technological changes” as “changes to the tools, machines, supplies, labor, instruments, skills, techniques, and devices by which laboratory tests are produced and used.” However, Quinn notes that in defining technological changes, CMS makes no acknowledgement that, like drugs, some particular advanced lab-developed tests (LDTs) are developed with large research trials by one manufacturer or provider; therefore the invested costs are vastly higher than the marginal costs of delivering one more test. In addition, CMS provides no information on how it would crosswalk from technology costs to total costs, says Quinn. “CMS must produce a more granular and explicit statement of the process it will go through to suggest (to extrapolate) new prices for comment from its proposed ‘technology review,’” concludes Quinn. “Otherwise, stakeholders may be subject to an arbitrary and inaccurate process in July 2014, with no time to provide appropriate data and corrections.” Cap PFS Tests at APC Rates In its second proposal, CMS would cap prices paid to independent labs for certain pathology tests at the payment rate for hospital outpatient services. CMS proposes that when the PFS price for a pathology test Current Procedural Terminology (CPT) code is higher than the ambulatory payment category (APC) price for the group of tests it is aggregated to, CMS will override the relative value unit (RVU) pricing system and use the lower APC price. For some pathology tests, this would cut 2014 payment by more than 70 percent. Quinn notes that there is little relationship between APC classification and the RVU prices of many CPT codes. In addition, the charge and cost-to-charge data from which CMS calculates APCs is “extremely nosiy,” he says. For APCs 342, 343, and 661, costs for tests by hospitals in each APC ranged from $1 to $3,095, $4 to $7,685, and $10 to $24,986. For a single CPT code cost (which may include multiples), submitted hospital costs (calculated from charges) ranged from $6 to $2,708 for immunohistochemistry, 88342. “On a CPT code line item basis, in this summer’s OPPS amended data, Pathology II (APC 433) contains codes with median charges ranging from $40 to $349, almost a factor of 10, in an APC that would be priced at calculated APC median of $57 next year,” writes Quinn. “It is no wonder that the costs or prices of some CPT codes are cut off when an APC rate is used as a cap.” Quinn says that it is unclear that CMS has the authority to do what it has proposed, noting that it is under statutory guidance to use practice expenses alone to set RVUs. Bundling Diagnostic Tests Quinn notes that in some ways this is the simplest, and in others the most complicated, CMS proposal. The hospital outpatient prospective payment system is based on packaging services; there are only several hundred ambulatory payment categories into which many thousand CPT codes are aggregated. Some APCs contain only one major service; others contain over 200 CPT codes. CMS proposes to move seven types of service from line item payment to bundled or packaged payment: (1) drugs used as a supply for a diagnostic test, (2) drugs used as supplies during surgical procedures, (3) clinical diagnostic laboratory tests, (4) procedures described by add-on codes, (5) ancillary services (including pathology tests), (6) bypass list diagnostic tests, and (7) device removal procedures. According to the proposal, CLFS tests will be bundled when they are provided on the same date of service as a primary service and ordered by the same practitioner who ordered the primary service. The new rule appears to apply if the specimen is drawn at the hospital or elsewhere on the same day as the “primary service.” Quinn notes that the impact of this proposal would fall much more on some specialties, such as oncology and endocrinology outpatient clinics, than others. The proposal also would discourage lab-intensive visits from occurring in the OPPS setting and would encourage them to occur in the freestanding Part B setting where the laboratories would be paid as fee-for-service line items. Takeaway: Medicare’s proposed payment policies are ill-conceived and should not be implemented as proposed.